RiskSeptember 26, 2022

SPACs Get More Bad News as Several Close

The pullbacks of Palihapitiya, Ackman and other investors illustrate the blank-check companies’ rough road.

Reported by Larry Light

The bad news keeps growing for special purpose acquisition companies, as investments in them pull back, public offerings shrink, regulatory scrutiny sharpens and several important players call it quits. In 2020 and early 2021, these blank-check companies were the toast of Wall Street; now they’re just toast.

Most telling was the retreat of the SPAC King, as he was called, from this arena. Last week, Chamath Palihapitiya, a former-Facebook-executive-turned-startup-investor, announced he was shutting down two of his SPACs—Social Capital Hedosophia Holdings Corp. IV and VI—and his investment firm was returning $1.6 billion to investors.

A SPAC raises money by going public, and then has a year or two to deploy it by buying usually nonpublic businesses. But Palihapitiya wrote his investors to say that he couldn’t find good enough target companies to purchase.

Another recent high-profile departure illustrates how deep this problem is. Celebrated hedge fund magnate Bill Ackman said in July that he was folding his Pershing Square Tontine, the biggest SPAC ever, and giving investors back the $4 billion raised for it. He bemoaned “the extremely poor performance of SPACs that have completed deals during the last two years which has damaged market perceptions of going public by merging with a SPAC.”

His SPAC tried to do a deal for a chunk of Universal Music Group, but that foundered due to opposition from the Securities and Exchange Commission.

Meanwhile, a SPAC’s plan to buy former President Donald Trump’s media company is in trouble. Investors in the SPAC, Digital World Acquisition, were pulling many millions out of the venture, according to the blank-check company.

Few SPAC deals are getting done, with fundraising for the entities dwindling and initial public offerings shriveled amid a severe stock bear market. Many once-celebrated SPAC deals have tanked. Sports betting firm DraftKings’ shares have dropped by almost half this year, far worse than the overall market. Virgin Galactic Holdings, a space-flight outfit founded by billionaire entrepreneur Richard Branson, has lost even more—almost two-thirds of its value—in 2022.

SPAC supporters say the concept still has a place in the investing world, but that its initial popularity lured too many weak entrants into the field—and once the market recovers, the asset class should find its feet.